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BMW Incurs $40 Million Fine for Safety Lapses

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Within our 2016 Predictions for Industry and Global Supply Chains, Prediction Five called out specific industry challenges in the New Year, which included automotive supply chains. An unprecedented level of regulative scrutiny has precipitated a large amount of product recalls that are taxing service focused and repair parts supply chains.

On Monday of this week, U.S. auto safety regulators fined luxury automaker BMW $10 million, part of a $40 million civil settlement over the German automaker’s safety lapses. The fine is the second paid by BMW since 2012 and the latest in a series of civil penalties imposed on major automakers by the National Highway Traffic Safety Administration (NHTSA).

Under the settlement, BMW admitted it did not comply with minimum crash protection standards, failed to notify owners of recalls in a timely fashion and failed to provide accurate information about its recalls to NHTSA.

According to a syndicated published report by Reuters, this settlement ends a NHTSA investigation into whether the company failed to issue a recall within five days of learning that it’s 2014 and 2015 Mini Cooper models failed to meet regulatory minimums for side-impact crash protection.

The $40 million settlement includes a $10 million fine, a requirement that the company spend at least $10 million meeting the order’s performance obligations, and $20 million in deferred penalties if the company fails to comply with the order or commits other safety violations.

BMW agreed to hire a government-approved independent safety consultant and disclose updated procedures to NHTSA. The agency has required a number of automakers to agree to independent monitors or retain outside consultants to improve safety procedures as part of settlements.

Of course, the most visible development in this area will be how government regulators ultimately deal with Volkswagen and its admission of circumventing air pollution standards in the U.S. and other countries.

Earlier this month, the agency fined Fiat Chrysler Automobiles $70 million for failing to disclose vehicle crash death and injury reports. That automaker was obligated to pay $70 million in July to resolve allegations it mishandled nearly two dozen recall campaigns covering more than 11 million vehicles. In January, Honda paid $70 million in fines for failing to disclose death and injury reports.

Hundreds of millions of dollars in fines may well be better invested in advanced technology that mines vehicle performance and repair incidents and more proactively alert regulators to issues. Then again, some dis-investment may be required to impress upon senior management that the implications for not conforming to timely regulatory reporting is a reduced performance bonus equivalent to the company’s cost of fines incurred.

 


Report Card for Supply Chain Matters 2015 Annual Predictions for Industry and Global Supply Chains- Part Five

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While industry supply chain teams wrap-up their various 2015 strategic, tactical, and operational line-of-business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.  Supply Chain Matters Blog

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year.  After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs.

In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.

In our Part Three posting, we revisited our supply chain industry-specific predictions.

In Part Four, we revisited our prediction on smarter data and predictive analytics and our prediction of a turbulent year in global transportation.

In this final scorecard commentary, we revisit our final two predictions.

2015 Prediction Eight: Industry Supply Chains Step-up Efforts Towards Supply Chain Vertical Integration and Modular Platform Strategies

Self-Rating:  3.0 (Max Score 4.0)

Our prediction was a belief that industry or company specific vertical integration and modular product platform strategies would accelerate in 2015. Our reasoning was that as manufacturers pursue a need for more agile and flexible global manufacturing sourcing strategies, that modularity in product and supporting process platforms will become more prominent.  This strategy further supports needed flexibilities in geographical and individual customer fulfillment for various market channels. Such strategies have been well demonstrated in high-tech, consumer electronics and in automotive environments, and our prediction was that these efforts would expand both in these industries and in others as well.

Our belief was that vertical integration strategy shifts would impact contract manufacturing models in the latter-half of this year, and indeed there are signs of this occurring.  In a Supply Chain Matters commentary in late August, we provided evidence of a changing contract manufacturing model within the high-tech industry. CMS firms such as Foxconn and Flex are steadily executing vertical integration and product modularity strategies. Foxconn is believed to be finalizing plans for investing in a massive electronic display manufacturing facility in China that would serve display needs for smartphones, consumer electronics and other industry needs. The leading CMS is also involved in a number of other strategies that integrate the high tech component supply chain. Flex itself is remaking itself to be a leading manufacturer of Internet of Things (IoT) enabled connected products that feature common components. That strategy has provided Flex with entry into other industrial verticals including medical devices and home appliances.

In the automotive sector, Tier One suppliers such as Johnson Controls and others are actively pursuing strategies to be one-stop suppliers for major motor vehicle functionality such as safety systems, on-board electronics, or alternative energy propulsion and regenerative systems.

We believe that these are two meaningful examples of more vertical integration as well as common platform that will evolve across other industries as manufacturers continue to revisit their contracted arrangements with contract manufacturers, suppliers and owned manufacturing.  While the timing related to our prediction may arguably be challenged, the evidence of strategy remains.

 

2015 Prediction Ten: Service Supply Chains Garner Increased Attention and New Investment Interest.

Self-Rating:  3.8 (Max Score 4.0)

This final prediction was somewhat obvious as-well. The prediction was that because of two primary motivations, multiple equipment manufacturers and services providers will place added emphasis in evaluating their service focused supply chains. That included after-market business process services, parts, service delivery, supply and demand networks.

One motivation was the increasing incidents and broader occurrence of product recalls brought about by tighter global regulation. Manufacturers have no choice but to protect the brand and customer retention.  The most obvious example was reflective in the automotive industry where a massive volume of high-visibility product recalls remain even as we pen our scorecard.  GM’s faulty ignition switch and other component problems, the multiple ongoing vehicle recalls among multiple global brands involving defective Takata airbag inflators continue to stress service supply chains. Even Tesla is not immune, having just recently recalled its entire on-the-road vehicle fleet to repair faulty seat belt connectors. The unpredicted bombshell in 2015 was Volkswagen’s alleged tampering with emissions from its small and mid-range diesel engines that is currently providing major challenges to its brand.  Yet to play out is the timetable for how all of the current effected vehicles on-the-road will be repaired or retro-fitted. In commercial aerospace, a continued aging fleet of aircraft operating around the clock adds more exposure to timely service and parts needs.   Where airlines have discovered more cost-effective models for outsourcing service needs, service providers themselves, whether independent or OEM, continue to experience the need for investment in processes and systems.

The other driver we predicted was building interest in IoT and connected networks which present new business models where equipment serves as the demand signal for maintenance, repair or consumable parts. Throughout 2015, there was high interest in this area, and General Electric was again the benchmark for how money can be made with a connected equipment business model.  Moving into 2016, we anticipate that interest will turn toward more discernable deployment of integrated product and service platforms.

 

This concludes our series of looking back on 2015 to assess how our Supply Chain Matters Predictions fared.  Once again, we trust our readers were able to gain benefits from following our series.  Again, feel free to share your own observations regarding our predictions, along with other important key supply chain, procurement and B2B developments that were meaningful in 2015.

As we move toward the latter stages of December, keep your browser pointed to Supply Chain Matters as we will shift our attention toward unveiling our 2016 annual predictions for industry and global supply chains.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

 


Country of Origin Legislative Actions for Food Has Broader Industry Supply Chain Implications

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In June, The United States House of Representatives voted to repeal country-of-origin labeling (COOL) for beef, pork, and chicken and social media commentary regarding the move continues to dominate as an ongoing trending topic.  The reasons are obvious- consumers demand and expect knowledge as to the specific sourcing origins of food products. Consumers are right to be concerned and watchful, and the impact of these actions continue to impact food, beverage and consumer product goods focused supply chains.

The original COOL legislation had good intent, requiring meat products sold in supermarkets and grocery stores to specifically indicate where the animal was born, raised and slaughtered.  Reports indicate that the original law was prompted by the lobbying of U.S. ranchers who compete with the Canadian cattle industry, and later garnered the interest of consumer watchdog interests.

But this current ongoing process now involves the political and economic implications of other supply chains, in addition to food.

The broader issue involves the World Trade Organization (WTO) which after the initial U.S. legislation was passed, ruled that the labels regarding animal origin would have a discriminatory impact against the two U.S. border countries, Canada and Mexico, and thus a barrier to free trade.  Both border countries indicate that the law requires that animals be segregated by country of origin, a costly process that has U.S. wholesale buyers avoiding the buying of export origin meat products.

Both countries are seeking permission to impose what is described as billions of dollars in added tariffs on U.S. goods in retaliation.  And there lies the supply chain impact which threatens to change the existing economics and stakeholder interests of cross-border trade.

U.S. legislators are thus caught in what is described as a damned if you do, or damned if you do not conundrum regarding the existing COOL repeal legislation which has now moved to the U.S. Senate for consideration.

In order to seek additional insights regarding the implications of COOL, Supply Chain Matters had the opportunity to recently speak with Candace Sider, vice-president of regulatory affairs, Canada, at international trade compliance services provider Livingston International. Ms. Sider has a significant background in understanding Canada’s regulatory processes involving interaction with federal and provincial officials, regulatory agencies and policymakers.

She explained that Canada viewed the original U.S. COOL labeling requirements as having a $3 billion impact on that country’s cattle and hog industry.  During the current arbitration period, decisions are expected to be made as to what commodities would remain on the original impacted list. If the surtax were to be implemented, importation from the U.S. of the subject products could ultimately passed on to consumers. The U.S. government has indicated to the WTO that it disputes Canada’s figures.  However, Canada is preparing to lift tariffs on U.S. imports that include in excess of 100 different commodities including products such as range and refrigerator parts, wine, and yes, chocolates.

The WTO is not expected to rule on the U.S.’s latest appeal to the threatened tariff increases until early August, or possibly September. Meanwhile, the implication of the ongoing dispute actually impacts more than just meat-focused supply chains.

Livingston is currently advising its clients to prepare for a number of potential scenarios involving the ongoing trade dispute process invoked by COOL.

Where all of this eventually ends-up is subject to many viewpoints.  After all, this is very much a process driven by economic, multi-industry and lobbyist forces.

However, one aspect is clear. The complexity of today’s globally based supply chains takes on many different dimensions and implications.  While you might have perceived that legislation affecting packaging disclosure of meat products has little to do with service parts, chocolates and wine, it indeed does. The takeaway is to nurture contacts and resources that can alert your team to ever changing developments and multi-industry implications.

Bob Ferrari

 


A Significant New Milestone Involving the Quality Perception Crisis Among Automotive Supply Chains

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Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.

While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.

The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.

This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.

In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.

Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair.  As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.

From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.

From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s.  However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.

To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time.  There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls.  Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.

From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change.  Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.

Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features.  From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


First 3D Printed Commercial Jet Engine Part Certified for Operational Use

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This week featured a significant announcement from General Electric, namely that the U.S. Federal Aviation Administration (FAA) certified a 3D-printed manufactured part to operate within certain GE commercial jet engines.

A blog commentary featured on the GE Reports site indicates that a fist-sized piece of silver metal that houses the compressor inlet temperature sensor inside a jet engine, known as T25, is becoming a symbol of one of the biggest changes sweeping jet engine design. GE Aviation is currently working with Boeing to retrofit more than 400 GE90-94B jet engines with the 3D printed part. This family of engines power Boeing’s 777 commercial aircraft. High resolution photos of these parts are featured in the commentary.

The report further indicates that GE Aircraft has already initiated flight tests for the next-generation LEAP jet engine, produced in a 50-50 consortium with CFM   GE-CFM CFM56 LEAP engineInternational, which will include 19 3D-printed fuel nozzles. The LEAP engine will power Airbus’s newly designed A320neo and Boeing’s 737MAX aircraft models.

The planned GE9X engine will further be developed with 3D-printed fuel nozzles and other parts.

GE was one of the early adopter manufacturer’s that has embraced additive manufacturing methods for nearly a decade. According to GE, additive manufacturing allows design engineers to replace complex assemblies with single parts that are lighter. The use of 3D-printing methods accelerates design development and new product introduction times. Once more, GE is printing parts from materials such a cobalt-chrome alloy. In the case of the GE90 printed nozzle housing, the process from final design to FAA certification and service introduction spans what is described as six months.

In digesting this report, Supply Chain Matters further envisioned that the introduction of such 3D-printed aircraft engine components can significantly benefit both ongoing production as well as operational service parts needs. Instead of stocking global-wide manufacturing or service parts depot inventories, replenishment orders can trigger the printing of an additional part, with considerable inventory cost savings. In some cases, we would envision the part being printed directly at a regional repair and maintenance depot.

Next-generation additive manufacturing methods are indeed beginning to make a presence and the benefits described by global manufacturers such as GE, are indeed described as breakthrough technology.

Bob Ferrari

 


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